FacebookTwitterGoogle+RedditEmail

Why Paulson’s Plan is a Fraud

Is the Paulson bailout itself as big a fraud as the leveraged subprime mortgages?

Yesterday, here on CounterPunch,  I discussed the bailout as proposed and noted that the proposal cannot succeed if it impairs the US Treasury’s credit standing and/or the combination of mark-to-market and short-selling permits short-sellers to prosper by driving more financial institutions into bankruptcy.

A reader’s comment and an article by Yale professors Jonathan Kopell and William Goetzmann  raise precisely this question of the fraudulence of the Paulson package.

As one reader put it,“We have debt at three different levels: personal household debt, financial sector debt and public debt.  The first has swamped the second and now the second is being made to swamp the third.  The attitude of our leaders is to do nothing about the first level of debt and to pretend that the third level of debt doesn’t matter at all.”

The argument for the bailout is that the banks will be free of the troubled instruments and can resume lending and that the US Treasury will recover most of the bailout costs, because only a small percentage of the underlying mortgages are bad.  Let’s examine this argument.

In actual fact, the Paulson bailout does not address the core problem.  It only addresses the problem for the financial institutions that hold the troubled assets. Under the bailout plan, the troubled assets move from the banks’ books to the Treasury’s.  But the underlying problem–the continuing diminishment of mortgage and home values–remains and continues to worsen.

The origin of the crisis is at the homeowner level.  Homeowners are defaulting on mortgages.  Moving the financial instruments onto the Treasury’s books does not stop the rising default rate.

The bailout is focused on the wrong end of the problem.  The bailout should be focused on the origin of the problem, the defaulting homeowners.  The bailout should indemnify defaulting homeowners and pay off the delinquent mortgages.  As Koppell and Goetzmann point out,  the financial instruments are troubled because of mortgage defaults.  Stopping the problem at its origin would restore the value of the mortgage-based derivatives and put an end to the crisis.

This approach has the further advantage of stopping the slide in housing prices and ending the erosion of local tax bases that result from foreclosures and houses being dumped on the market. What about the moral hazard of bailing out homeowners who over-leveraged themselves?  Ask yourself: How does it differ from the moral hazard of bailing out the financial institutions that securitized questionable loans, insured them, and sold them as investment grade securities? Congress should focus the bailout on refinancing the troubled mortgages as the Home Owners’ Loan Corp. did in the 1930s, not on the troubled institutions holding the troubled instruments linked to the mortgages. Congress needs to back off, hold hearings, and talk with Koppell and Goetzmann.Congress must know the facts prior to taking action.  The last thing Congress needs to do is to be panicked again into agreeing to a disastrous course.

PAUL CRAIG ROBERTS was Assistant Secretary of the Treasury in the Reagan administration. He was Associate Editor of the Wall Street Journal editorial page and Contributing Editor of National Review. He is coauthor of The Tyranny of Good Intentions. He can be reached at: PaulCraigRoberts@yahoo.com

Your Ad Here
 

 

 

 

More articles by:

Paul Craig Roberts is a former Assistant Secretary of the US Treasury and Associate Editor of the Wall Street Journal. Roberts’ How the Economy Was Lost is now available from CounterPunch in electronic format. His latest book is The Neoconservative Threat to World Order.

Weekend Edition
May 25, 2018
Friday - Sunday
Melvin Goodman
A Major Win for Trump’s War Cabinet
Andrew Levine
Could Anything Cause the GOP to Dump Trump?
Pete Tucker
Is the Washington Post Soft on Amazon?
Conn Hallinan
Iran: Sanctions & War
Jeffrey St. Clair
Out of Space: John McCain, Telescopes and the Desecration of Mount Graham
John Laforge
Senate Puts CIA Back on Torture Track
David Rosen
Santa Fe High School Shooting: an Incel Killing?
Gary Leupp
Pompeo’s Iran Speech and the 21 Demands
Jonathan Power
Bang, Bang to Trump
Robert Fisk
You Can’t Commit Genocide Without the Help of Local People
Brian Cloughley
Washington’s Provocations in the South China Sea
Louis Proyect
Requiem for a Mountain Lion
Robert Fantina
The U.S. and Israel: a Match Made in Hell
Kevin Martin
The Libya Model: It’s Not Always All About Trump
Susie Day
Trump, the NYPD and the People We Call “Animals”
Pepe Escobar
How Iran Will Respond to Trump
Sarah Anderson
When CEO’s Earn 5,000 Times as Much as a Company’s Workers
Ralph Nader
Audit the Outlaw Military Budget Draining America’s Necessities
Chris Wright
The Significance of Karl Marx
David Schultz
Indict or Not: the Choice Mueller May Have to Make and Which is Worse for Trump
George Payne
The NFL Moves to Silence Voices of Dissent
Razan Azzarkani
America’s Treatment of Palestinians Has Grown Horrendously Cruel
Katalina Khoury
The Need to Evaluate the Human Constructs Enabling Palestinian Genocide
George Ochenski
Tillerson, the Truth and Ryan Zinke’s Interior Department
Jill Richardson
Our Immigration Debate Needs a Lot More Humanity
Martha Rosenberg
Once Again a Slaughterhouse Raid Turns Up Abuses
Judith Deutsch
Pension Systems and the Deadly Hand of the Market
Shamus Cooke
Oregon’s Poor People’s Campaign and DSA Partner Against State Democrats
Thomas Barker
Only a Mass Struggle From Below Can End the Bloodshed in Palestine
Binoy Kampmark
Australia’s China Syndrome
Missy Comley Beattie
Say “I Love You”
Ron Jacobs
A Photographic Revenge
Saurav Sarkar
War and Moral Injury
Clark T. Scott
The Shell Game and “The Bank Dick”
Seth Sandronsky
The State of Worker Safety in America
Thomas Knapp
Making Gridlock Great Again
Manuel E. Yepe
The US Will Have to Ask for Forgiveness
Laura Finley
Stop Blaming Women and Girls for Men’s Violence Against Them
Rob Okun
Raising Boys to Love and Care, Not to Kill
Christopher Brauchli
What Conflicts of Interest?
Winslow Myers
Real Security
George Wuerthner
Happy Talk About Weeds
Abel Cohen
Give the People What They Want: Shame
David Yearsley
King Arthur in Berlin
Douglas Valentine
Memorial Day
FacebookTwitterGoogle+RedditEmail